MCQ On Financial Management
MCQ On Financial Management
MCQ On Financial Management
3. What are the earnings per share (EPS) for a company that earned Rs. 100,000 last year in
after-tax profits, has 200,000 common shares outstanding and Rs. 1.2 million in
retainedearning at the yearend?
a) Rs. 100,000
b) Rs.6.00
c) Rs.0.50
d) Rs.6.50
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5. The market price of a share of common stock is determinedby:
7. of a firm refers to the composition of its long-term funds and its capitalstructure.
a) Capitalisation
b) Over-capitalisation
c) Under-capitalisation
d) Marketcapitalization
8. Inthe , the future value of all cash inflow at the end of time horizon at
a particular rate of interest iscalculated.
a) Risk-freerate
b) Compoundingtechnique
c) Discountingtechnique
d) Risk Premium
9. is the price at which the bond is traded in the stockexchange.
a) Redemptionvalue
b) Facevalue
c) Marketvalue
d) Maturityvalue
10. enhance the market value of shares and therefore equity capital is not free ofcost.
a) Facevalue
b) Dividends
c) Redemptionvalue
d) Book value
13. is defined as the length of time required to recover the initial cashout-lay.
a) Payback-period
b) Inventory conversionperiod
c) Discountedpayback-period
d) Budgetperiod
14. refers to the amount invested in various components of currentassets.
a) Temporary workingcapital
b) Net workingcapital
c) Gross workingcapital
d) Permanent workingcapital
15. is the length of time between the firm’s actual cash expenditure and its own cashreceipt.
a) Net operatingcycle
b) Cash conversioncycle
c) Working capitalcycle
d) Gross operatingcycle
16. refers to a firm holding some cash to meet its routine expenses that are incurred in the
ordinary course ofbusiness.
a) Speculativemotive
b) Transactionmotive
c) Precautionarymotive
d) Compensatingmotive
17. refers to the length of time allowed by a firm for its customers to make payment for
theirpurchases.
a) Holdingperiod
b) Pay-backperiod
c) Average collectionperiod
d) Creditperiod
18. Amounts due from customers when goods are sold on creditarecalled .
a) Tradebalance
b) Tradedebits
c) Tradediscount
d) Tradeoff
19. and are the two versions of goals of the financial management of
thefirm.
21. Consider the below mentioned statements: 1. The dividends are not cumulative for equity
shareholders, that is, they cannot be accumulated and distributed in the later years. 2.
Dividends are taxable. State True orFalse:
a) 1-True,2-True
b) 1-False,2-True
c) 1-False,2-False
d) 1-True,2-False
22. and carry a fixed rate of interest and are to be paid off irrespective of the
firm’srevenues.
a) Debentures,Dividends
b) Debentures,Bonds
c) Dividends, Bonds
d) Dividends, Treasurynotes
23. Consider the below mentioned statements: 1. A debt-equity ratio of 2:1 indicates that for
every 1 unit of equity, the company can raise 2 units of debt. 2. The cost of floating a
debt is greater than the cost of floating an equity issue. State True orFalse:
a) 1-True,2-True
b) 1-False,2-True
c) 1-False,2-False
d) 1-True,2-False
.
a) Liquidity,accountability
b) Liquidity,profitability
c) Liability,profitability
d) Liability,liquidity
25. XYZ is an oil based business company, which does not have adequate working capital. It
fails to meet its current obligation, which leads to bankruptcy. Identify the type of
decision involved to prevent risk ofbankruptcy.
a) Investmentdecision
b) Dividenddecision
c) Liquiditydecision
d) Financedecision
26. The rate of interest offered by the fixed deposit scheme of a bank for 365 days and above
is 12%. What will be the status of Rs. 20000, after two years if it is invested at this point
oftime?
a) Rs.28032
b) Rs.24048
c) Rs.22056
d) Rs.25088
b) Use the income statement to determine earnings after taxes (net income) and divide by
the number of common sharesoutstanding.
c) Use the income statement to determine earnings after taxes (net income) and divide by
the number of common and preferred sharesoutstanding.
d) Use the income statement to determine earnings after taxes (net income) and divide by
the forecasted period's earnings after taxes. Then subtract 1 from the previously
calculatedvalue
30. Palo Alto Industries has a debt-to-equity ratio of 1.6 compared with the industry average
of 1.4. This means that thecompany
a) will not experience any difficulty with itscreditors.
b) has less liquidity than other firms in theindustry.
c) will be viewed as having high creditworthiness.
d) has greater than average financial risk when compared to other firms in itsindustry.
31. Kanji Company had sales last year of Rs. 265 million, including cash sales of Rs. 25
million. If its average collection period was 36 days, its ending accountsreceivable
balance is closest to . (Assume a 365-day year.)
a) Rs. 26.1million
b) Rs. 23.7million
c) Rs. 7.4 million
d) Rs. 18.7 million
32. A company can improve (lower) its debt-to-total assets ratio by doing which of the
following?
a) Borrowmore.
b) Shift short-term to long-termdebt.
c) Shift long-term to short-termdebt.
d) Sell commonstock.
33. Which of the following statements (in general) iscorrect?
34. Debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E)ratio?
a) .2
b) .6
c) .667
d) .333
41. All of the following influence capital budgeting cash flows EXCEPT:
a) accelerateddepreciation.
b) salvagevalue.
c) tax ratechanges.
d) method of project financingused.
42. The estimated benefits from a project are expressed as cash flows instead of income
flowsbecause:
a) it is simpler to calculate cash flows than incomeflows.
b) it is cash, not accounting income, that is central to the firm's capital budgetingdecision.
c) this is required by the Internal RevenueService.
d) this is required by the Securities and ExchangeCommission.
a) presentvalues
b) net presentvalues
c) IRRs
d) profitabilityindexes
48. Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of
the projects differ). Ranking these projects on the basis of IRR, NPV, and PI
methods give contradictory results.
a) willnever
b) willalways
c) may
d) will generally
49. Preferred shareholders' claims on assets and income of a firm come thoseof
creditors those of common shareholders.
a) before; and alsobefore
b) after; butbefore
c) after; and alsoafter
d) equal to; and equalto
50. Youareconsideringtwomutuallyexclusiveinvestmentproposals,projectAandproject
B. B's expected value of net present value is $1,000 less than that for A and A has less
dispersion. On the basis of risk and return, you would say that
a) Project A dominates projectB.
b) Project B dominates projectA.
c) Project A is more risky and should offer greater expectedvalue.
d) Each project is high on one variable, so the two are basicallyequal.
51. To increase a given present value, the discount rate should beadjusted
a) upward.
b) downward.
c) Nochange.
d) constant
53. Which of the following would be consistent with a more aggressive approachto
financing workingcapital?
a) Financing short-term needs with short-termfunds.
b) Financing permanent inventory buildup with long-termdebt.
c) Financing seasonal needs with short-termfunds.
d) Financing some long-term needs with short-termfunds.
54. Which asset-liability combination would most likely result in the firm's havingthe
greatest risk of technicalinsolvency?
a) Increasing current assets while lowering current liabilities.
b) Increasing current assets while incurring more current liabilities.
c) Reducing current assets, increasing current liabilities, and reducing long-termdebt.
d) Replacing short-term debt withequity.
55. Which of the following illustrates the use of a hedging (or matching)
approachtofinancing?
a) Short-term assets financed with long-termliabilities.
b) Permanent working capital financed with long-term liabilities.
c) Short-term assets financed withequity.
d) All assets financed with 50 percent equity, 50 percent long-term debtmixture.
56. In deciding the appropriate level of current assets for the firm, management isconfronted
with
a) a trade-off between profitability andrisk.
b) a trade-off between liquidity andmarketability.
c) a trade-off between equity anddebt.
d) a trade-off between short-term versus long-termborrowing.
66. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000.
If the IT is improved to 8 times while the COGS remains the same, a substantial
amountof funds is released from or additionally invested in inventory. Infact,
a) $160,000 isreleased.
b) $100,000 is additionallyinvested.
c) $60,000 is additionallyinvested.
d) $60,000 isreleased.
67. Ninety-percent of X company's total sales of $600,000 is on credit. If its year-end
receivables turnover is 5, the average collection period (based on a 365-day year) andthe
year-end receivables are,respectively:
a) 365 days and $108,000.
b) 73 days and$120,000.
c) 73 days and$108,000.
d) 81 days and$108,000.
70. Increasing the credit period from 30 to 60 days, in response to a similar action taken by
all of our competitors, would likely resultin:
a) the minimum rate that a firm should earn on the equity-financed part of aninvestment.
b) a return on the equity-financed portion of an investment that, at worst, leaves the
market price of the stockunchanged.
c) by far the most difficult component cost toestimate.
d) generally lower than the before-tax cost ofdebt.
75. In calculating the proportional amount of equity financing employed by a firm, weshould
use:
a) the common stock equity account on the firm's balancesheet.
b) the sum of common stock and preferred stock on the balancesheet.
c) the book value of thefirm.
d) the current market price per share of common stock times the number ofshares
outstanding.
76. In calculating the costs of the individual components of a firm's financing, the
corporatetax rate is important to which of the following component costformulas?
a) commonstock.
b) debt.
c) preferredstock.
d) none of theabove.
77. The common stock of a company must provide a higher expected return than the
debtofthe same companybecause
78. A quick approximation of the typical firm's cost of equity may be calculatedby
a) adding a 5 percent risk premium to the firm's before-tax cost ofdebt.
b) adding a 5 percent risk premium to the firm's after-tax cost ofdebt.
c) subtracting a 5 percent risk discount from the firm's before-tax cost ofdebt.
d) subtracting a 5 percent risk discount from the firm's after-tax cost ofdebt.
79. Market values are often used in computing the weighted average cost of capitalbecause
80. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-
taxcomponent costs of a Company's long-termfinancing.
81. Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual
dividend. The preferred stock has a current market price of $96 a share. Thefirm's
marginal tax rate (combined federal and state) is 40 percent, and the firm plans to
maintain its current capital structure relationship into the future. The component costof
preferred stock to Lei-Feng, Inc. would beclosestto .
a) 6percent
b) 6.25percent
c) 10percent
d) 10.4percent
82. The term "capital structure" refersto:
a) long-term debt, preferred stock, and common stock equity.
b) current assets and currentliabilities.
c) total assets minusliabilities.
d) shareholders'equity.
83. A critical assumption of the net operating income (NOI) approach to valuationis:
a) that debt and equity levels remainunchanged.
b) that dividends increase at a constantrate.
c) that koremains constant regardless of changes inleverage.
d) that interest expense and taxes are included in thecalculation.
85. Two firms that are virtually identical except for their capital structure are selling
inthemarket at different values. According toM&M
a) one will be at greater risk ofbankruptcy.
b) the firm with greater financial leverage will have the highervalue.
c) this proves that markets cannot beefficient.
d) this will not continue because arbitrage will eventually cause the firms to sell atthe
samevalue.
86. What is the value of the tax shield if the value of the firm is $5 million, its value if
unlevered would be $4.78 million, and the present value of bankruptcy and agency costs
is$360,000?
a) $140,000
b) $220,000
c) $360,000
d) $580,000
88. What are the different options other than cash used for distributing profits to
shareholders?
a) Bonusshares
b) Stock split
c) Stockpurchase
d) All ofthese
92. When total current assets exceeds total current liabilities it refersto.
a. Gross WorkingCapital
b. Temporary WorkingCapital
c. Both a andb
d. Net WorkingCapital
93. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is
15% that of debt is 10% and the corporate tax rate is 32%, what is the Weighted Average
Cost of Capital(WACC)?
a)10.533%
b) 7.533%
c) 9.533%
d) 11.350%
97. Which of the following is not a metric to use for measuring the length of the cashcycle?
a) Acid testdays.
b) Accounts receivabledays.
c) Accounts payabledays.
d) Inventorydays.
99. Which of the following are not among the daily activities of financialmanagement?
a) sale of shares andbonds
b) creditmanagement
c) inventorycontrol
d) the receipt and disbursement offunds
100. Debt Equity Ratio is 3:1,the amount of total assets Rs.20 lac,current ratio is1.5:1
and owned funds Rs.3 lac.What is the amount of currentasset?
a) Rs.5lac
b) Rs.3lac
c) Rs.12 lac
d) d) none of theabove.
b) Will beaffected
c) Will improve
d) none of theabove.
104. In the balance sheet amount of total assets is Rs.10 lac, current liabilities Rs.5 lac
& capital & reserves are Rs.2 lac .What is the debt equityratio?
a) a)1;1
b) 1.5:1
c) c)2:1
d) none of the above.
105. In last year the current ratio was 3:1 and quick ratio was 2:1.Presently current
ratio is 3:1 but quick ratio is 1:1.This indicatescomparably
a. high liquidity
b. higherstock
c. lowerstock
d. low liquidity
106. Authorised capital of a company is Rs.5 lac, 40% of it is paid up. Loss incurred
during the year is Rs.50,000. Accumulated loss carried from last year is Rs.2 lac. The
company has a Tangible Net Worthof
a. Nil
b. Rs.2.50 lac
c. (-)Rs.50,000
d. Rs.1 lac.
b) Negative
c) Nil
d) None of theabove
109. Current ratio is 4:1.Net Working Capital is Rs.30,000.Find the amount of current
Assets.
a)Rs.10,000
b)Rs.40,000
c) Rs.24,000
d) Rs.6,000
b) Rs.45,000
c) Rs.(-) 45,000
d) Rs.(-)18000
b) Book debts
d) Inventories.
112. The ideal quick ratio is
a)2:1
b)1:1
c)5:1
Answer Keys
1 d 21 d 41 d 61 b 81 d 101 c
2 b 22 b 42 b 62 a 82 a 102 b
3 c 23 d 43 a 63 c 83 c 103 c
4 a 24 b 44 c 64 b 84 b 104 d
5 d 25 c 45 c 65 d 85 d 105 b
6 c 26 d 46 a 66 d 86 d 106 c
7 a 27 b 47 b 67 c 87 b 107 d
8 c 28 a 48 c 68 d 88 d 108 c
9 c 29 c 49 b 69 d 89 a 109 b
10 b 30 d 50 a 70 a 90 d 110 d
11 a 31 b 51 b 71 a 91 b 111 d
12 c 32 d 52 c 72 a 92 d 112 b
13 a 33 b 53 d 73 a 93 c
14 c 34 c 54 c 74 d 94 d
15 a 35 a 55 b 75 d 95 a
16 b 36 d 56 a 76 b 96 c
17 d 37 c 57 a 77 c 97 a
18 b 38 b 58 b 78 a 98 c
19 a 39 a 59 c 79 b 99 a
20 b 40 d 60 c 80 b 100 c